Economic determinants of residential mortgage choice

Variable rate mortgages (VRMs) have been introduced into the mortgage market as a means of addressing the housing finance problems encountered over the past two decades. To learn more about the demand for VRMs, this study analyzes borrower choice behavior and its economic determinants. In order to estimate the probability of borrowers choosing VRMs rather than conventional fixed rate mortgages, discrete choice (logit) models are specified and validated for both cross-section and pooled time-series cross-section data samples. These samples contain mortgage application information for the years 1978 through 1981. They were drawn from the Loan Register Report of the California Department of Savings and Loan. The probability of choosing a VRM is estimated as a function of selected price components of the mortgage instrument, borrower characteristics, and economic expectations.